Wednesday, March 30, 2016

When it comes to housing, renting often gets a bad rap. The conventional wisdom says: “renting is just throwing your money away.”

Why? Because when you rent, you aren’t building up ownership in an asset — like a home — that will grow in value over time. Right?

Well, kinda wrong actually.

Let’s suppose you take all that money you’d have to cough up for the down payment on your new home purchase, and you invest it in the stock market instead. Well, that’s an appreciating asset too. In fact, if you look at the averages over the long haul, the stock market is more likely to outperform the housing market. In fact, historically, home prices have only kept pace with inflation, while the stock market has done much better.

The point is: you have to consider the opportunity cost of passing up an investment in the stock market (or elsewhere) in order to make a down payment on a house.

You also have to consider that when you start out paying your mortgage, just a small fraction of your initial payments goes toward ownership of the house. Most of your monthly payments go toward interest, taxes, and insurance for many, many years.

You also have to consider that you have a lot more expenses when owning versus renting: maintenance, repairs, property taxes, homeowner association dues, additional utility fees, etc. That’s all money you could be investing elsewhere.

You also have to consider that you have more responsibilities and less flexibility when you own your home. You have to fix broken stuff. You can’t just move at the drop of a hat.

OK, so then renting is better than buying, right?

Nope.

The answer is: it depends. You have to consider all the important factors. You have to examine the opportunity costs. You have to do the — gasp — math.

That’s the real point to make with your kids. When you’re considering a big, important purchase, take the time to think through all the key factors. Do. The. Math. The answer just might surprise you.

P.S. If you find yourself doubting that renting can be more economically attractive than buying — or vice versa for that matter — be sure to check out today’s article. Paula walks through the rent vs. buy math in excruciating detail. Don’t be afraid though. Hard to believe, but she actually makes it entertaining!

Tuesday, March 29, 2016

Then it’s the perfect time to teach your teen how to file taxes. Ease into the process while the paperwork is still nice and simple, like a single W-2 income statement from the local fast food joint.

What’s in it for your teen?

Well, aside from picking up a critical life skill (yawn), most likely a refund (cha-ching). Unless, of course, your teen is a withholding wizard. Not likely. Admit it. You don’t know how to fill out a W-4 properly either.

Here’s how you can teach your working teen how to file taxes with minimal effort and no charge:

Visit the IRS free file site. Make sure your teen meets the income requirements. If not, congratulations for raising the next Mark Zuckerberg.

Sunday, March 27, 2016

“But Dad, I don’t care about money. I just don’t want to think about it.”

Your kids need to understand: if they ignore money, they’ll eventually be thinking about it constantly. Do I have enough money for rent? Do I have enough for dinner? Do I have enough for this? Do I have enough for that?

No, you simply can’t ignore money in the real world. But there is a way to rarely think about it.

How? Today’s article states it succinctly: “If you don’t like to think about money, the best way to make sure you don’t have to is to set up a system for properly managing it.”

What’s a system? It’s a set of rules that reliably translate an input into a desired output. The neat thing about having a system is, once it’s in place, you don’t have to think about it much any more. You feed something appropriate into the top of your system, and the right thing magically pops out the bottom. Again and again. It’s like a gumball machine: drop a coin in the top and a gumball reliably shoots out the bottom.

Start your kids off with a very simple savings system. Whenever income drops into your kid’s system — whether from allowance, chores, odd jobs, a summer job, or a birthday check from grandma — automatically peel 10% off and plunk it into a separate savings bucket. Sweeten the pot with a matching contribution each time if you can.

Simple rules. Simple system. Rinse and repeat. Eventually, your child will have a nice little pile of savings set aside — without even thinking.

Roll the clock forward. Your kids will recognize a very similar system when they get their first jobs. The 401(k). Thanks to you, they’ll know a good savings system when they see it. They’ll opt in. Without thinking twice.

Saturday, March 26, 2016

In many cases, that’s not a truthful response to your child’s latest spending request.

Instead, the truth often hinges on your vague definition of “enough.” How much is enough? You know it in your parental gut when you see it. But explaining “enough” to your child can be challenging.

What are reasonable limits on sporting gear, trendy clothes, mobile phones, the latest hot gizmo? What role does your neighborhood play in setting the “enough” bar? Your kid’s peers? Your own upbringing? The media? Your values?

Ron Lieber offers some concrete tips for setting the “enough” bar in his article How Much Money Is Enough? Having kids share some financial skin in the game and slowing down purchase decisions are two great techniques.

The practical guidelines are great, but it’s the conversations that really matter. As Ron says in his book, The Opposite Of Spoiled: “Every conversation about money is also about values.”

So, embrace that next frivolous spending request from your child. It’s a valuable opportunity to slow down and explore the murky nature of “enough.”

That parking ticket. That stolen bike (that wasn’t locked). That iPhone that went through the wash (hint: try stuffing it in a bag of rice first).

Does your teen:

Pay for it out of savings?

Get a loan from the Bank of Mom/Dad at an insanely high interest rate?

Let you pick up the tab? Hakuna matata!

Gold star for option 1. Your teen has learned the importance of maintaining an emergency fund in liquid assets. Double gold star if your teen actually has a separate stash of a hundred dollars or more that is explicitly set aside as an emergency fund. That’s a fantastic habit to learn early. Why not start as a teen? Make it a family rule.

Silver star for option 2. Better for your teen to learn now that a loan is a very expensive and painful way to cover everyday emergencies. If not, your teen might become one of the many young adults who scrambles to cover life’s emergencies with high interest debt — from credit cards to payday loans. What seems like “no big deal” at first quickly snowballs into financial catastrophe. As the saying goes: “You can run into debt, but you have to crawl out of it.” Best to learn that brutal fact early.

Rotten tomatoes for option 3. You know why, so no sense belaboring it.

As today’s article points out, 40% of the households in the U.S. are “liquid asset poor.” Translation: their lack of a cash savings cushion makes it likely they’ll have to turn to high interest debt when that next emergency hits. Teach your teen how to be part of the 60% instead.

Teens already know “stuff” happens. Teach them how to deal with it. In cash.

Tuesday, March 22, 2016

Unpaid household chores are a great way to teach your kids to the importance of pitching in and pulling their weight as a responsible members of a family or community.

Paid odd jobs are a great way to teach your kids the critical connection between hard work and money.

Both are important.

Searching for some odd job opportunities for your pre-teens? From consigning toys to throwing puppet shows, today’s article lists 13 money making opportunities for youngsters around the house and in the neighborhood.

And here’s a bonus opportunity to consider. Do your kids like to draw? They can earn money by selling T-Shirts, mugs, and other items featuring their doodles. Sites like Cafepress make it super easy to upload artwork, plaster it on a variety of products, and sell through an online storefront.

Monday, March 21, 2016

There’s something your teen should know about “gut decisions” and investing. They’re a very bad combo. Today’s article cites yet another study that proves the point.

Here’s how your gut reacts to market swings:

The market is booming. Everyone is getting rich but you. Your gut is telling you to go all in. Double down.

The market is tanking. Everyone is getting slaughtered. Your gut is telling you to get out. Call in all the chips.

Your gut is wrong. Your gut is telling you to buy high and sell low. The exact opposite of what good investors do.

To put it in teen-speak: if the stock market is like a big awesome party, your gut will be telling you to show up right when the party ends or to leave right before the party kicks into gear. Not cool.

That’s why Warren Buffett, the most successful investor in the world, famously said: “Be fearful when others are greedy and greedy when others are fearful.”

Sunday, March 20, 2016

Here’s a simple story to share with your kids about saving and investing.

Once upon a time, Noah, Chloe, Quincy, and Lyla were all buddies who graduated from college together 40 years ago.

Noah decided to start saving right away at age 25 and saved $10,000 every year for 40 years until his current age of 65. He kept his savings safe at his local bank.

Chloe talked to Noah and did exactly the same thing for 40 years. But after talking to her parents one weekend about the stock market, she decided to invest her $10,000 every year in a low cost index fund instead of leaving her savings in the bank.

Quincy talked to Chloe and decided to follow her approach too. Unfortunately, after 10 years, Quincy couldn’t come up with the $10,000 any more to save and invest, so he did nothing more for the remaining 30 years.

Lyla came to the party late. She missed out on all the saving and investing chatter and didn’t do either for the first 10 years. Finally, at age 35, she talked to Chloe and copied her saving and investing plan for the remaining 30 years.

So, in summary:

Noah saved for 40 years keeping the money at the local bank.

Chloe invested for 40 years.

Quincy invested for 10 years and then did nothing for 30 years.

Lyla did nothing for 10 years and then invested for 30 years.

Guess who ended up in the worst shape financially?

Slow and steady wins the race. Right?

You can’t win if you give up a quarter of the way through like Quincy. Right?

And you can’t win if you miss the starting gun like Lyla, only jumping in after your opponents are already a quarter of the way there. Right?

Wrong. Despite the slow and steady saving for the entire race, Noah ends up the big loser. By a long shot.

Why? Saving by itself just doesn’t cut it. The compound returns from investing long term in the stock market are like a turbo boost that gets stronger and stronger over time.

Not surprisingly, Chloe, with the turbo booster on the whole way, wins big.

But who wins between Quincy and Lyla? Remember, Quincy started right away, but quit after just 10 years. Lyla started 10 years late, but invested three times longer than Quincy. Seems like Lyla should win that one easily.

Nope. Quincy edges out Lyla.

If we assume, like today’s article does, that the money in the bank earned 2.25% per year (generous — must have been a pretty awesome CD!) and the index fund earned 6.5% per year (fairly conservative over 40 years), here are the final results:

Decade 1

Decade 2

Decade 3

Decade 4

Ending Amount

Chloe

Invest

Invest

Invest

Invest

$1,870,480

Quincy

Invest

$950,588

Lyla

Invest

Invest

Invest

$919,892

Noah

Save

Save

Save

Save

$652,214

Wow. Chloe knocks it out of the park, Quincy and Lyla are neck and neck in the middle, and Noah is bringing up a distant rear.

Three things to teach your kids with this story:

Invest your savings. Just look at the incredible power of compounding over time as the rate of return increases by even a small amount. Note: the savings here refers to what you’re able to accumulate after you’ve set aside an emergency fund in a safe, liquid bank account.

Start investing early. Hint: convince your teen to open a Roth IRA with money from that first summer job plus some parental matching if possible. See here for more info.

Invest in low cost index funds. Take it from Warren Buffett himself: “A low-cost index fund is the most sensible equity investment for the great majority of investors.”

May your kids invest in low cost index funds early and often... and live happily ever after.

Saturday, March 19, 2016

Should parents compensate kids for academic performance? Now there’s a controversial topic!

Several studies have shown that paying for grades, does not improve performance.

A Harvard study looked at a different angle: paying kids for the activities that lead to the result — like reading, studying, and attending class — rather than paying for the end result itself — good grades. This approach, it turns out, can be effective.

Here’s the downside for rewarding only the the ultimate grade: if the semester starts going down the tubes, the reward starts to feel unreachable and motivation disappears. On the other hand, if you’re paying for a habit like reading regularly or doing homework, it’s never too late. The upside always exists to improve.

And here’s the kicker from the Harvard study: student effectiveness persisted even after the paying stopped. The implication? Building the initial habit is the key. Once set, it sticks.

Certainly something to consider if your child is struggling in school.

Jump to a topic like “What’s Up With The Stock Market?” You’ll find a summary of what’s covered in the episode, a formal lesson plan for teachers, and a link to the episode clips (lower right hand side).

Thursday, March 17, 2016

It’s not unusual for parents to teach kids money basics like saving, budgeting, and even charitable giving. But today’s article reminds us that investing rarely makes the cut. Why?

“It’s for the rich.”

“It’s too complicated.”

“It’s too risky.”

It doesn’t have to be any of those things.

Investing can be cheap. You can start investing with as little as $25 at many brokerages. In fact, a recent startup has no minimum balances and no trading fees. It’s called Robinhood. As you can tell by the name, no need to be rich to benefit.

Investing can be simple. Don’t pick any stocks in particular, pick them all. Choose a low cost index fund that captures a little piece of every stock in the market. No need to overthink it.

Investing can be low risk. With an index fund that spreads your investment across the whole market, you’ll lower the risk of picking a loser. Keep buying more at regular intervals, and you’ll lower the risk of buying at the top. Stay invested for decades, and you’ll lower the risk of selling at the bottom. Combine the three to earn solid returns with minimal risk.

To recap: purchase a low cost, diversified index fund at regular intervals over a long timeframe. Cheap. Simple. Low risk.

Pretty basic.

That’s all you need to know to add investing to your kid’s financial quiver.

Guess who bears the brunt of the overdraft fees? Customers with low balances. Like low income customers. Like your teen.

The banks are playing a lucrative game. It’s called Hide-The-Bank-Fee.

So, before your teen starts using that first bank account, play your own game: Bank Fee Bingo. Make your teen circle all the fees on the account agreement. Discuss each one. Don’t be surprised if locating and understanding all the fees is harder than you thought!

When your teen can find every fee and explain when it applies, she’s ready to level up and beat the banks at their own game.

Friday, March 11, 2016

“I’ve heard stories of kids getting $100 bills for their first tooth.”
~ Ron Lieber, New York Times Personal Finance Columnist

WTF?! That’s short for What The Fairy?! :-)

You have to wonder what’s going through the minds of parents when they drop that kind of cash on a young kid.

Of course, leaving some cash under the pillow in exchange for a tooth is a time-honored parenting tradition. And, it’s natural for parents to be curious about what the going rate is. But, as in all matters money, don’t fall prey to the “keeping up with the Joneses” syndrome. That’s not a financial habit you want to be passing along to your kids — not even indirectly via the Tooth Fairy. And, as Erma Bombeck quipped: “Before you try to keep up with the Joneses, be sure they’re not trying to keep up with you.”

Besides, the tooth fairy is about magic, not money. So dial back the dollars and dial up the creativity. There are some wonderfully creative ideas in today’s article — love the origami dollars, foreign money, rhyming poems, and notes written backwards. There are even more ideas in Chapter 5 of Ron Lieber’s book, The Opposite of Spoiled.

Thursday, March 10, 2016

It’s already time for you and your teen to start thinking about lining up that summer job. Yes, you’ll probably need to help facilitate. (That thing called “initiative” is still a bit of an abstract concept for teens with underdeveloped frontal lobes.)

The good news is, the job can be bad. In fact, one might argue the crappier the better. Why? A super thankless summer job will teach your teen some or all of the following:

So start the summer job conversation with your teen today. No need to mention the sucky parts though. Sell your teen on the extra spending money angle. The character building can be left as a secret extra bonus.

P.S. Oh, and the other great thing about your teen getting a wage paying summer job is that you can start a “Family 401(k)” — one of the smartest parental financial moves you can make. See the details here.

The bottom line: Kids need to understand how loans work in the real world. They need to have a visceral understanding of just how painful debt can be. If they do, they’ll be more careful with that first loan as a young adult, be it a student loan, a car loan, or carrying a credit card balance.

So, don’t make fake loans to your kids, or they’ll end up in real financial trouble later.

Conan O’Brien has a quick tip for introducing kids to the trauma of taxes at an early age. He sums it up in this favorite tweet:

“Just taught my kids about taxes by eating 38% of their ice cream.”

After the kids stop crying, you can have a quick conversation about where taxes go. The big three dominate the federal list: 27% military, 26% health, 15% interest on the federal debt. Of course, that third one might just start the tears all over again. See today’s article for more info and a nice little summary graphic.

Monday, March 7, 2016

Economist Noreena Hertz posed the following question to her focus group of 14-21 year olds: What would be the killer personal finance app?

One teen responded: “An app which, each time I was going to buy something, sent me a message which said, ‘Do you really need this?’”

It’s so simple. It’s so effective. Introspection — the examination of your own thoughts and feelings — is the killer personal finance habit.

No need to wait for the app though. Coach your kids to pause and reflect before each purchase: “Do I really need this?” And, if the answer is “yes,” tell your kids to ask themselves one more question: “Why?”

Teach your kids early on that personal finance isn’t so much about math as it is about behavior and emotion. Slowing down and asking why can make all the difference. Reflection is a real impulse killer.

Read more about Noreena’s research and why she dubs today’s teens “Generation K” here. Hint: it’s related to The Hunger Games.

Sunday, March 6, 2016

The best teachers know how to make abstract concepts concrete for their students — and sometimes even tasty.

The 6th grade teacher in today’s article is a wonderful example. She breathes life into the economic concept of marginal utility using a box of donuts. Here’s how you can do the same for your kids:

Sit your child down with a box of donuts.

Ask your child how excited she is to eat that first donut on a scale of 1 to 10. An eleven!

After that first donut. Poll your child on the excitement level for the next donut. Maybe a 9.

Repeat until you get to a 1 or a zero or maybe even a negative number. Time to grab the splat mat.

Your child now has a visceral understanding of diminishing marginal utility. The utility (in this case measured by level of enthusiasm) of each marginal unit (in this case each donut) decreases as each additional one is consumed.

Why is this concept useful in everyday life? It’s a way of thoughtfully allocating dollars to a set of purchases. Consider a warehouse store like Costco or Sam’s Club where the goal is to sell you a a supersized number of units at a discount. Your child now knows firsthand that the marginal utility of the units diminishes precipitously as she works her way to the bottom of the box. (Remember that last donut — yech!) Recalling that queasy feeling, perhaps she’ll opt for a smaller size and spend her remaining dollars on another item. That’s getting the most overall utility out of every dollar. Better yet, maybe she’ll save those extra dollars instead.

Saturday, March 5, 2016

Not surprising. We only let them pay for the “good” stuff: fast food, movies, video games, music. Mostly “wants”. If you’re paying for all their “needs” directly, it’s no wonder they have no idea how much real life costs. The result? At best, a rude financial awakening as they exit the nest. At worst, crippling consumer debt as they adjust to harsh reality.

Lynne Finch has a simple solution: as the teens get older, buy less and less on their behalf. You still provide most of the funds, but they make the purchases and track expenses versus a budget. Lynne calls it the “semi-independent” stage.

Now list a couple everyday items that cost $2.99 or more. Grande latte. Burrito. An online game. Maybe becoming a millionaire isn’t just for the ultra brilliant or the ultra lucky after all. A little discipline and a lot of time go a long way.

The upshot? Start early enough with as little as $2.99, and compound interest can still work its magic.

Kids just can’t hear that enough.

1Why 8%? That’s roughly the long term historical annualized return of the stock market, give or take a percentage point. Want to play around with the actual figures for the S&P 500 over different date ranges? Check out this cool calculator.

Wednesday, March 2, 2016

What if you could teach your teen a critical financial skill while reducing emotional conflict along the way? To any embattled teen parent, that sounds about as magical as cold-fusion, but read on for the recipe.

Pick an area of spending that your teen is particularly passionate about. Clothing is a classic choice. It’s well defined. It’s a basic need that regularly balloons into “want” territory. It’s subject to loads of impulsive decision making and peer pressure. It’s a classic emotional friction point between parents and teens.

Tell your teen:

“You will have a dedicated expense account for spending in this area.”

“You will be in complete control of the spending decisions.”

“To receive your funds in the account, you must propose a budget that we will review, revise, and agree upon together.”

“You can receive the funds up front in one lump sum, or monthly in installments. Your choice.”

“You will not receive any additional funds above and beyond the budget. When the money’s gone, it’s gone. Period.”

Where’s the conflict reduction part you ask? Note all the “you” and “yours” language above. It turns out teens crave responsibility. If they own the budget and the decision making, they’ll own the consequences too. Without argument.

You’re in the grocery aisle picking out peanut butter with the kids. What’s the unit price of one brand relative to the other? What is unit price? Are we willing to pay a larger unit price for one brand over another? Why? What happens to the unit price as the size of the package goes up?

You just swiped your credit card at the checkout stand. Where is the money coming from? Does it come out of your bank account right away? No? So you got a mini loan? When do you have to pay that loan back? What if you don’t pay it back at the end of the month?

As adults, we take these simple money mechanics for granted almost everyday, but your kids have no idea.

Unless you tell them. Early. Often. Repeatedly.

Seize an everyday money moment today.

See today’s article for more tips from 3 experts and a depressing graphic that will emphasize the importance of your money mentoring role. (Hint: you’re in charge because schools certainly aren’t.)

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